Nephros Reports Second Quarter 2012 Financial Results

RIVER EDGE, N.J., Aug. 14, 2012 /PRNewswire/ -- Nephros, Inc. (OTC Bulletin Board: NEPH), a global medical device company developing and marketing filtration products for therapeutic applications, infection control, and water purification, announced today financial results for the three and six months ended June 30, 2012.

Recent Highlights

Appointed Frank Zumbo, Denise Pappas, and Stephen Bob as Regional Sales Managers to focus on ultrafilters in dialysis and hospital markets

New distributor agreements signed with Vantage Water and OnLine Sales for distribution of water and bicarbonate ultrafilters

Initial shipment of UF-30L Military ultrafilters

First European water filter order processed through Nephros International

New Nephros website launched

"The second quarter of 2012 focused on strategic alignment followed by execution," said John C. Houghton, President and CEO of Nephros. "As a result of the strategic agreement with Medica, we are now able to offer a full range of ultrafiltration products worldwide. The initial expansion of our sales team and our newly executed distributor agreements provide the foundation for sales growth in the United States, I next look forward to implementing our European sales strategy. In parallel, Nephros will continue to evaluate opportunities to leverage the resources of a strategic partner to most effectively market our recently cleared hemodiafiltration system, while continuing to foster our ongoing cooperation with the U.S. military."

Financial Performance for the Second Quarter Ended June 30, 2012

For the quarter ended June 30, 2012, Nephros recognized total net revenues of approximately $302,000 compared with $637,000 in the corresponding period of 2011, a decrease of $335,000 or 53%.

The decrease in total net revenue is primarily attributable to a decrease in sales of the Mid-Dilution hemodiafilters in Europe of approximately $329,000 and a decrease of $29,000 in net sales of our water filtration products in the second quarter of 2012 compared to the same period in 2011. Net sales of the water filtration products approximated $132,000 for the three months ended June 30, 2012 compared with $161,000 in the corresponding period of 2011, a decrease of 18%. Partially offsetting these decreases was an increase of $170,000 of licensing revenue from the licensing agreement with Bellco S.r.l. during the three months ended June 30, 2012 compared to the same period in 2011. As a result of the Bellco S.r.l. licensing agreement, revenue previously recognized in product sales in 2011 is now recognized in licensing revenue.

The contract with the Office of U.S. Naval Research ended as of March 31, 2012 and, therefore, no revenue was recognized with respect to this contract for the three months ended June 30, 2012 compared with $130,000 in the corresponding period of 2011.

Operating expenses for the three months ended June 30, 2012 were approximately $1,079,000 compared with $801,000 in the corresponding period of 2011. The increase of approximately $278,000 is primarily related to an increase in selling, general and administrative expenses of approximately $178,000 or 27% in the second quarter of 2012 compared to the same period in 2011. The increase is primarily due to increased personnel costs related to the recruitment and hiring of employees including the expansion of the U.S. sales force.

Research and development expenses increased by approximately $82,000 in the second quarter of 2012 compared to the same period in 2011. Increases were primarily related to the fact that the contract with the Office of U.S. Naval Research ended as of March 31, 2012 and, therefore, all personnel costs are classified as operating expenses instead of being apportioned to cost of revenue.

Depreciation [and amortization] expense increased by $18,000 in the second quarter of 2012 compared to the same period in 2011 due to the amortization of the capitalized costs associated with the Medica supply agreement entered into in April 2012.

Nephros' net loss was approximately $754,000 or $0.07 per basic and diluted common share for the second quarter of 2012 versus a net loss of approximately $602,000 or $0.06 per basic and diluted common share in the second quarter of 2011. Nephros' net loss increased $152,000 or 25% in the current year's second quarter primarily due to the increase in operating expenses in the second quarter of 2012 compared to the second quarter in 2011.

For the first six months of 2012, Nephros has received $356,000 of proceeds from the exercise of warrants.

As of June 30, 2012, Nephros had cash and cash equivalents in the amount of $987,000.

Hospital and Dialysis Applications - Ultrafilters

For the second quarter of 2012, Nephros recorded approximately $132,000 of sales related to its water and bicarbonate ultrafiltration products, an 18% decrease over the prior year. For the first half of 2012 Nephros recorded $379,000 of sales related to its water and bicarbonate ultrafiltration products, a 24% increase over the prior year. With the recent additions of three Regional Sales Managers, the execution of distribution agreements with national distributors and the introduction of an enhanced product range, we believe that Nephros is positioned for growth in the waterborne hospital infection control and dialysis markets. More stringent standards for dialysis water purity from the Association for the Advancement of Medical Instruments (AAMI), bundling of dialysis reimbursement payments, and Centers for Medicare & Medicaid (CMS) initiatives which relate hospital reimbursement rates to infection control compliance can also provide positive momentum for increased adoption of the Nephros ultrafiltration products. Following the execution of the Medica agreement, we are now offering a full range of point-of-use filters for hospital infection control, including SafeSpout and SafeShower filters, worldwide.

Military Applications - Ultrafilters

In response to a Special Notice Announcement from the U.S. Army, Nephros submitted its Individual Water Purifier (IWP) device containing the Nephros proprietary ultrafilter technology for consideration as part of a standard issue personal hydration pack for soldiers in the field. Nephros has been informed by the Military Government Review Agency that its IWP has been validated to meet the military's NSF P248 standard for emergency military operations as a microbiological water purifier. In April 2012, Nephros presented its IWP as part of the Experimental Forward Operating Base demonstration and assessment event at Camp Lejeune in North Carolina. The IWP was evaluated by approximately 100 U.S. Marines. At the same event the IWP was also evaluated for performance by a Military Assessment Team and it is expected that the Military will make recommendations for future potential use. The Special Notice Announcement indicated that an official Sources Sought solicitation would be released; however, this solicitation has not yet been published. To date, Nephros has received purchase orders for approximately 1,300 IWP's from the U.S. armed forces.

European Hemodiafiltration

Under the licensing agreement with Bellco, S.r.l., Nephros began 2012 with receipt of the second installment payment of euro 750,000 in January. The third and final installment payment of euro 600,000 is payable to Nephros on January 15, 2013. Beginning on January 1, 2015 until December 31, 2016, Nephros expects to receive royalty payments from Bellco as part of the license agreement. During the license period, Nephros no longer recognizes sales from the licensed territory, but rather licensing revenue and royalty payments.

U.S. Hemodiafiltration

In April 2012, Nephros received FDA 510(k) clearance to market the Company's hemodiafiltration (HDF) system in the U.S. for the treatment of patients with chronic renal failure when used with a UF controlled hemodialysis machine that provides ultrapure dialysate in accordance with current AAMI/ANSI/ISO standards. Nephros intends to pursue a limited launch of its HDF system prior to expanding into the broader market. We are currently preparing our HDF system for a scaled market release and expect to have units placed in a select number of dialysis clinics in the fourth quarter of 2012. In parallel, Nephros will continue to explore opportunities to leverage the resources of a strategic partner to most effectively address the market. There are more than half a million patients in the U.S. whose kidneys have failed requiring them to seek treatment. Of these, approximately 370,000 are receiving hemodialysis. In 2009 the total medical care costs for Chronic Renal Failure reached $42.5 billion. The Nephros HDF system is the only FDA-cleared on-line HDF therapy available in the U.S.

About Nephros, Inc.

Nephros, Inc., headquartered in River Edge, New Jersey, is a global medical device company that focuses on the development and commercialization of liquid purification filters that combine a best in class purification to flow rate ratio with filter endurance. Nephros ultrafilters remove biological contaminants from water or bicarbonate to provide ultrapure water and bicarbonate for use in hemodialysis. Nephros ultrafilters also purify water in the hospital/healthcare setting particularly at the point of use, i.e. at the end of the faucet/shower head or in-line under the sink. This approach has been shown to be particularly useful for infection control. Nephros is currently developing its filter technology in individual water purifiers for military applications. The company has also developed an effective alternative to current hemodialysis therapy known as mid-dilution hemodiafiltration (MD-HDF). Nephros' unique and proprietary blood purification technology enables on-line MD-HDF to be offered to chronic renal failure patients.

For more information about Nephros, please visit the company's website at www.nephros.com.

Forward-Looking Statements

This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines for bringing such products to market and the availability of funding sources for continued development of such products and other statements that are not historical facts, including statements which may be preceded by the words "intends," "may," "will," "plans," "expects," "anticipates," "projects," "predicts," "estimates," "aims," "believes," "hopes," "potential" or similar words. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include the risks that:

we may not be able to continue as a going concern;

we may not be able to obtain funding if and when needed or on terms favorable to us in order to continue operations;

we may not obtain appropriate or necessary regulatory approvals to achieve our business plan;

products that appeared promising to us in research or clinical trials may not demonstrate anticipated efficacy, safety or cost savings in subsequent pre-clinical or clinical trials;

we may encounter problems with our suppliers and manufacturers;

we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures;

HDF therapy may not be accepted in the United States and/or our technology and products may not be accepted in current or future target markets, which could lead to failure to achieve market penetration of our products;

we may not be able to effectively market our products, including our HDF system

we may not be able to sell our chronic renal failure therapy or water filtration products at competitive prices or profitably;

we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; and

we may not be able to achieve sales growth in key geographic markets.

More detailed information about the Company and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this press release, is set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and our other periodic reports filed with the SEC. We urge investors and security holders to read those documents free of charge at the SEC's web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law.